Definition
TWAP, short for Time-Weighted Average Price, is a market pricing concept that represents the average price of an asset over a defined time interval, with each moment in time contributing equally. It is used to smooth out short-term price fluctuations and provide a more stable reference price than a single spot trade or quote. In crypto markets, TWAP can be calculated from on-exchange trades, on-chain swaps, or other price feeds, depending on the venue and data source.
Because TWAP averages prices across time rather than volume, it is distinct from volume-weighted measures and is particularly relevant in environments with volatile or thin liquidity. It can serve as a benchmark for evaluating execution quality, a reference for derivatives pricing, or an input into pricing systems that aim to mitigate the impact of sudden price spikes or dips.
Context and Usage
In crypto trading, TWAP is often referenced in relation to execution quality and the mitigation of slippage, since it provides a neutral time-based benchmark against which actual trade prices can be compared. Market participants may use TWAP-based references when analyzing how closely their executions align with an averaged market price over a chosen window.
TWAP values can also be produced or consumed by an oracle when smart contracts or off-chain systems require a time-averaged price feed, including for products such as perpetual futures or dated futures. In decentralized environments, the way TWAP is computed and updated can influence sensitivity to MEV and other forms of price manipulation, because the averaging window and data source affect how easily short-lived price distortions can impact the reported average.